Business Case Studies & Business Publications

Portfolio Selection and the Capital Asse...

Lipson, Marc L.

Technical Note

Portfolio Selection and the Capital Asset Pricing Model

Lipson, Marc L.

F-1604 | Published September 18, 2009 | 6 pages Technical Note

Collection: Darden School of Business

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In the context of determining an optimal portfolio to recommend to two hypothetical investors, this structured analysis leads students through a series of steps examining return data for three stocks. The analysis first explores the effects of portfolio formation on returns and volatility. With the addition of a market index and a bond portfolio, students easily recognize how portfolios from these to investment vehicles may be optimal. The analysis then explores stock betas as a measure of risk and the statistical properties of those betas. At the conclusion, students will have a practical understanding of the capital asset pricing model.

The principal objectives of this structure exercise is to familiarize students with the capital asset pricing model, including an appreciation for the portfolio effects that justify the model. Specific skills developed by the exercise include the indentification of return and volatility in portfolios, the ability to visualize investments in return/standard deviation space, an understanding of personal investment recommendations in light of portfolio theory, and the calculation of betas.